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WHAT IS ECONOMICS?

The Department of Economics at Indiana State University is committed to a pluralistic approach to the study of
economics, and this pluralism is represented in both the teaching and research of our faculty. By addressing the
definition of economics, this statement provides a broad-brush perspective on what this pluralism entails. It
provides an understanding of the orientation of our department for those considering the study or teaching of
economics at ISU.

THE ESSENCE OF ECONOMICS

Economics is the study of the production, exchange, and distribution of wealth. Wealth is anything that
contributes to the living and work conditions of people. Some wealth is provided directly by nature, such as
sunlight and the air we breathe. However, much of any society’s wealth is produced by combining human labor with
nature and with the capital (tools, machines, and built structures) carried over from previous production.
Economists often use the term resources to describe the part of wealth – labor, nature, and capital – that is used to
create more wealth. Technology signifies the scientific knowledge and practical methods used to combine and apply
these resources in production.

Exchange refers to the ways in which newly produced wealth and rights to access wealth are transferred among
individuals in a society. An important type of exchange is market exchange, in which items of wealth (produced or
inherited) are assigned money prices and exchanged on that basis. Other types of exchange include command (decision
making by hierarchical authority) and cooperation (decisions taken by mutual, non-coercive, agreement), both of which
take place within and among nearly all businesses, governments, and families. Closely related to exchange is
distribution, which describes how society’s wealth is shared among different individuals and groups. Like exchange,
the distribution of wealth is determined by specific actions of markets, commands, and cooperation.

In short, economics is much more than the study of markets. It encompasses any and all social relations and
institutions bearing upon the production, exchange, and distribution of wealth. The subject-matter of economics is
thus much broader than business administration or political science (although it may be thought of as containing
elements of both) and somewhat narrower than sociology (which studies social relations and institutions in general,
not just from the standpoint of production, exchange, and distribution of wealth).

A PLURALITY OF APPROACHES TO ECONOMICS

The most common analytical approach to economics is based on the notion of scarcity, which is understood as the
tension between limited resources and relatively unlimited human wants. Stated simply, people, both individually and
collectively, want more wealth than can be produced with the limited quantities of labor, natural resources, and
capital goods available. As a result, people are constantly making individual and collective choices concerning what
to produce and how to produce it. In this view, scarcity is also an essential background for understanding the problem
of distribution. Indeed, without scarcity the question, “for whom to produce” would lack all relevance. Economists
who think in these terms often emphasize the advantages, in terms of both efficiency and freedom, of using market
exchange as the main form of resource allocation instead of command and cooperation. Indeed, the demonstration of
these purported advantages is the chief preoccupation of mainstream economics. This pro-market orientation is also
evident in the emphasis on “microeconomics” - analysis of individual markets and decision-makers - within mainstream
theory.

Many economists disagree with the mainstream treatment of scarcity as an inherent human condition and question the
usefulness of the pro-market, micro-oriented perspective. Without denying the reality of scarcity, these dissenting
economists point out that both human needs and the uses of productive resources are shaped by an economy’s underlying
social relations and institutions. These relations and institutions contain important structural inequalities in the
distribution of wealth and decision-making power. From this “political economy” perspective economists should not
treat scarcity as a natural fact but should also investigate how an economy’s fundamental social relationships reshape
and even intensify scarcity, especially from the standpoint of relatively powerless individuals and groups.

Such a critical economics starts not with mechanisms of exchange, but with more basic social relations that
determine production and ownership of wealth. These social relations result in power structures based on class
(workers versus capitalists, for example), gender, ethnicity, and inter-national relations. Indeed, political economy
often treats the forms of exchange as mechanisms by which unequal power structures are reproduced, or as objects of
conflict among social groups and nations. This approach to economics is much broader than the mainstream’s focus on
comparative efficiency of alternative forms of exchange.

These different approaches explain disagreements among economists concerning the usefulness of mathematical and
statistical models for studying and predicting economic processes. Broadly speaking, mainstream economists tend to be
more optimistic about such quantitative modeling devices – although it is important to point out that many mainstream
economists are also master storytellers. Critical economists, on the other hand, are skeptical about the ability of
mathematical models to capture the complex economic dynamics associated with changing institutions and power
relations and the often conflictive nature of social relations. Critical economists do employ quantitative models
to shed light on specific well-defined questions within their broader research agenda. But they make much greater
use of historical, institutional, and even socio-psychological analysis.

ECONOMICS AT ISU

Those who study economics at ISU have the advantage of being exposed to both of the broad perspectives sketched
above in an open, non-dogmatic atmosphere of intellectual inquiry. All faculty members in our department are
committed to maintaining methodological pluralism within the economics profession – a pluralism that recognizes the
scientific legitimacy of both mainstream and non-mainstream perspectives.